Patent Trolls Plague Chip Vendors

MADISON, Wis. — One of the unintended consequences of the M&A feeding frenzy in the semiconductor industry is that more chip vendors are getting targeted by patent trolls.

Jean-Christophe Eloy

Jean-Christoph Eloy, president and CEO of Yole Développement (Lyon, France), told EE Times that the semiconductor market embodies “all the ingredients” that make it attractive to patent licensing companies (PLC).

A PLC, also sometimes called a non-practicing entity (NPE) or more pejoratively “Patent troll,” neither makes nor markets products. It derives its income from licensing patents to or litigating against operating companies suspected of infringing patent rights, Eloy explained.

Eloy believes chip vendors have become more vulnerable in recent years. Because of a strong consolidation trend with many mergers and acquisitions in the semiconductor market, a plethora of patents is up for sale, and countless products integrated with semiconductor devices are already on the market.

Eloy shared several key findings based on research done by KnowMade, Yole’s sister company — including identifying the main patent trolls in the semiconductor field, litigation risk assessment from patent licensing companies that acquired patents from 2013 to 2016, and specific patented technologies acquired by patent licensing companies since 2013.

KnowMade’s data shows that between 2013 and 2016, more than 40 NPEs acquired US patents in the semiconductor field. Those NPEs include Wi-LAN, Tessera, Intellectual Ventures and Conversant IP management.

Topping the list is Wi-LAN Inc. based in Ottawa, Canada. The company acquired 2,048 U.S. patents in 2015, mainly from Infineon/Qimonda and Freescale.

In 2015, the same year the company acquired patents from Freescale and Infineon, Wi-LAN also started to litigate. Yole expects such patent litigation to continue for years.

"According to our analysis, the main companies facing the highest risk of patent litigation from patent licensing companies are the end-user companies." So why is it that the end-user companies are at highest risk? Could it be that the chip vendors refuse to protect their customers? Could it be that the end users, happy to not have to pay a premium for the latest and greatest technology will purchase products and turn a blind eye to the possibility of infringement? Based on my experience, I believe that both are probably involved. The chip vendors are offshore, intentionally have no presence in the U.S. for reasons including that the U.S. has some of the highest taxes in the world. There is an added benefit that not having a U.S. presence means that they are out of reach of U.S. courts. The end-users can argue that they didn't know the products infringe so they are innocent. Unfortunately for them, the law doesn't work that way.

Back to the end-user companies, when given notice of an infringement they could stop using the infringing technology, or their vendors could offer to resolve infringement matters directly with the patent holders or the vendors could indemnify their customers for infringement. Or they could refuse to purchase the product without a contractural agreement by the vendor to indemnify them for any infringement. Based on the number of lawsuits mentioned in the article, apparently the chip vendors don't want to take care of their customers and those customers don't want to stop using the infringing technology.

It seems to me that the underlying problem here is that the chip vendors don't make any effort to respect U.S. intellectual property rights, including patent rights. If the vendors made a sincere and concerted effort not to infringe, or if when they did discover they infringe resolve the matter (take a license?) with the patent owners, then their customers wouldn't have to worry. Instead, I believe many offshore manufacturers simply copy the latest and the best technology without any regard whatsoever for the technology owner's rights, and with mutual winks and a nods, sell it to their end-users. It isn't just patented technology that gets copied and sold in this manner. Trade secrets, trademarks and copyrighted goods like clothing, music and movies are routinely stolen as well. After all, there is a thriving market for designer knockoffs and neither the seller or buyer wants to think about infringement - until of course they get caught.

But I digress. Let me explain one scenario which leads to so called patent trolls which I believe is widespread in various forms. Investors put money into companies, and that money is used for (among other things) R&D. This creates new technology which is then patented. That new technology is private property and like other company assets has value.

When for some reason the company falls on hard times or even goes under, the investors try to recoupe as much of their investment as they can by mergers, acquisitions and selling unused property, including the patents. It is not uncommon however to see some or a lot of the companie's assets disappear. Computers and test equipment suddenly go missing, software is copied and so on. The thieves attack during the disruption and if they are caught they are thrown in jail.

Meanwhile, the unscruplous copiests (thieves of another kind) are busy appropriating and putting the patented technologies into their own products and exporting those products to the U.S. The so called patent trolls leagally purchase the patents from the investors, hoping to realize a profit on their own investment and most likely know or at least suspect that there is substantial infringement. It may in fact be that infringement which caused the original owner who did all of the R&D to fall on hard times.

The unscruplous copiests don't stop selling the infringing products and frequently won't even respond to attempts by the new patent holder to resolve the matter. The copiests stonewall the patent owner and let their customers deal with the problem they have created. Then the new patent owners, the ones who pay good money to the original investors (who funded the R&D that created the technology) try to make a profit. And for doing so they are labeled trolls?

In a similar situation, real estate investors bid on foreclosed property that the banks put up for auction. When the have a winning bid and take over the property they either sell it or rent it out. Nobody calls them trolls for making a return on their investment. The business models are quite similar.

So, if you disagree with the patent enforcement business model, let's assume while you're on vacation and without your permission someone sells your house to someone who gets a deal that is too good to be true. When you return and discover the buyer in your house and try to get them out of the house the seller and buyer stonewall. Then when you sue to evict the buyer who they can call you a troll.

It's really the same business model - taking some else's property without their permission, selling it to someone else and then stonewalling the property owner. Of course not every infringement results from the above or a similar set of circumstances. Some companies do unknowingly and innocently find themselves infringing someone else's patents. You generally don't hear about them because if they are an ethical company they will get together with the patent owner to resolve the matter.

So how should the "the end-user companies" avoid patent trolls. First Caveat Emptor, if the product has the latest and greatest technology have your own patent attorneys check it out. Second, get your suppliers to contractually agree to step in and deal with the patent owner if there is a charge of infringement.

End users get hit most often because the infringement occurs when a patent-infringing item is sold in or sometimes imported into the country where the patent is valid. Thanks to the cheap and easy route to getting patents in the USA -- and the rubbish examination standards before grant -- many companies file only in the USA, and coincidentally this is also where there are most lawyers on the planet.

So if company A designs a chip which is manufactured by foundry B, built into a phone (or whatever) in a factory run by company C and then imported into the USA and sold by company D, then D is the company who infringes the patent and can be sued by a patent troll.

Unless they've got a cast-iron non-infringement guarantee passing all the way back down the chain to company A -- unlikely since the consequential losses could be massive -- they're the ones who'll have to go to court and fight the troll. They might have a worthless piece of paper from company A which says that they're not aware of any patent infringement but this doesn't help.

Yes the system is broken -- especially in the USA -- and most of the people who make money out of it are lawyers. The company I used to work for once had to get a written opinion from a US patent lawyer agreeing with our own lawyer's opinion that we probably weren't infringing a patent (to avoid potential triple damages for wilful infringement); that one sheet of paper with three paragraphs on it cost $20,000...